APAC real estate investment transaction volumes down 43% to USD 52.9b in H1 2020

Slowing activity comes despite unprecedented continued demand for investment class real estate.

JLL surveyed top investment leaders from 38 global and regional investors with a combined AUM of more than USD 1.8 trillion on how COVID-19 is impacting their strategic investment decisions and planning. The majority of survey respondents identified themselves as General Partners (74%), and typically invest on a global and regional basis. They represent some of the world’s largest real estate investors and asset managers, primarily sourcing capital from Europe and North America.

Here’s more from JLL:

Transaction volumes slowing, but most expect a rebound in 2021

Investment activity slowed significantly in the first half of 2020. Asia Pacific transaction volumes totalled USD 52.9 billion in the first six months of the year, down 43% or USD 40.3 billion from the same period last year (RCA, JLL, July 2020). Volumes were even slower in 2Q20 when many countries had imposed some form of COVID-19 related lockdown measures, with volumes reaching just USD 24.2 billion. This is 42% lower than the 2Q quarterly average of USD 41.6 billion recorded between 2015 and 2019. Slowing activity comes despite unprecedented continued demand for investment class real estate.

Globally, private equity investors are sitting on a near record USD 337 billion of dry powder (JLL Global Real Estate Perspective, August 2020) and are looking for market dislocations and distress. This may spur activity in the rest of 2020 and 2021.

While volumes are down in 1H20, around 32% of survey respondents expect a recovery in 2H20, while 52% expect recovery in 1H21. The core markets of Japan, Australia, South Korea, China, and Singapore may potentially see an increase in activity between now and the end of 2021, with survey respondents expecting to increase their exposure to these geographies over this period.

Uncertainty limits capital deployment

The ability to deploy capital was a concern for many investors before COVID-19. Lack of available investment product, and competition from other investors were key factors limiting investors’ ability to deploy capital. While these considerations remain key, COVID-19 has added additional challenges for investors looking to expand their real estate portfolios.

Survey respondents suggest that uncertainty is now the largest challenge they face when deploying capital. Around 60% of those surveyed cited uncertainty, whether it be uncertainty on underwriting assumptions (43% cited rent assumptions, vacancy forecasts, cost of capital) or pricing uncertainty (17%), as their number one challenge in deploying capital in the current environment.

The unprecedented nature of COVID-19 has created a considerable amount of broad economic uncertainty. For real estate markets, adding to this level of complexity is the relatively strong investment market that many geographies experienced preCOVID-19. This is one key factor which is limiting activity in the market at this point in time.

Lack of investment product was a key challenge before COVID-19, and remains a key challenge for many survey respondents (18%). Around 65% of those surveyed plan on being net buyers this year. This will continue to increase competition in the market. Additionally, there is little sign of distress at the moment, and with investors still in price discovery mode, many potential sellers are taking a wait and see approach before undertaking divestment strategies. This will likely further temper transaction volumes this year. Travel restrictions (14%) round out the key challenges cited by respondents.

Returns trending down in 2020

Economic contraction across many countries has translated to investors lowering their total return growth expectations in 2020. Unsurprisingly, almost 90% of survey respondents expect 2020 total returns to be lower than 2019 returns - 64% expect returns to marginally deteriorate from 2019 levels, while almost a quarter (24%) anticipate a significant deterioration. A small proportion expect returns this year to remain the same (11%) or improve (1%).

While the majority expect returns to fall this year compared to 2019, intra-regional investors within Asia Pacific were more positive. Of the respondents, 16% expect their returns to be at least on par with or better than 2019 returns (four percentage points higher than the 12% survey total). Larger investors (AUM ≥ USD 20.0 billion) were also similarly more upbeat, with 15% expecting equal or better returns in 2020.